23 Things They Don't Tell You About Capitalism by Ha-Joon Chang | Book review

If a Martian came to earth, wrote nobel laureate Herbert Simon, he would think we lived not in a market economy but an organisational one: the majority of the world's activity is the product of planning within large firms, not random transactions in a marketplace. If you coloured the planned parts green and the market red, the Earth would appear as large green areas connected with red lines.

This striking image stands at the heart of Ha-Joon Chang's latest book and exemplifies its method: Chang, a prizewinning Cambridge economist and former World Bank consultant, is determined to make us see modern capitalism in a way free-market economics does not.

In 23 lucid, sometimes breezily didactic chapters, Chang takes apart the stricken ideology of neoliberalism. He contends, for starters, that free markets do not exist; that all markets are constrained by, and thus created by, legal interference but that we only see the interference when it conflicts with our cultural values. He argues that low inflation has not made the world more stable; that governments can and do pick winners (ie direct private business) spectacularly well; that the welfare state makes economies more dynamic.

On the discipline of economics he offers the damning judgment that it has been worse than useless: it has provided the theoretical justification for the pursuit of catastrophic policies. Economists, he writes, have justified the policies that have led to slower growth, higher inequality, heightened job insecurity and more frequent financial crises. "Economics, as it has been practised for the last three decades, has been positively harmful for most people."

In his most audacious assault, Chang attempts to show that the decline of manufacturing compared to services is a) over-stated (because of mis-classification) and b) primarily a function of manufacturing's efficiency and dynamism, allowing it produce more with less.

The much-vaunted dominance of the service-based economy in the Anglo-Saxon countries, he argues, is simply the product of low service-sector productivity and the low global tradeability of services. Viewed this way, a UK economy dominated by distribution hubs, retail parks, call-centres and cappuccino bars does not look like a post-industrial Utopia but a monument to inefficiency.

Chang is no anti-capitalist: he believes a different kind of capitalism is possible. Though he never describes the model in full, it would look something like a cross between modern-day France and South Korea in the 1990s: the state not hesitating to slap tariffs on imported goods, or to direct large companies' investment decisions. Above all, the state would claim the right to regulate financial markets, to shrink them, reduce their effectiveness, and where necessary outlaw them: if we are serious about preventing another meltdown, we should ban complex financial instruments unless they can unambiguously be shown to benefit society in the long run.

Chang is increasingly influential on the centre-left of the Labour party. His demands for a return to industrial policy, for stronger manufacturing, and a turn away from the obsession with tertiary education chime well with the zeitgeist that has developed after the Brown-Mandelson era.

Chang's method is not to engage with the arguments of the neoliberals but to knock them down with assertions. To City finance types and mainstream economists the book will read like a series of sharp and wilful blasphemies. And this is a weakness: because, if free-market ideology is fractured, the case for a return to state capitalism is by no means proven.

He deploys facts and statistics tellingly, as in his demonstration that the US's social mobility is among the lowest in the developed world. But he makes no attempt to grapple with the problem that state capitalism hit its own crisis in the early 1970s; a crisis from which the free-market model emerged triumphant because the arguments of the Keynesians had collapsed.

Anyone advocating a return to state-directed capitalism must address this problem above all, because globalisation and technological change make the terrain for a state capitalist project much more challenging than in the postwar boom: we live in an era of disruptive technologies, the empowered consumer and globally mobile capital.

This is a problem Chang solves through denial: he denies the internet has made any great impact on economic growth; rejects the idea that we're entering an information-driven age; and denies formal education is a proven route to greater social mobility. Likewise, by insisting all capital is essentially national, Chang rejects the central tenet of the globalisation thesis.

He wants a capitalism more in tune with human values, less financially frenetic, more equal in outcomes. But he cannot explain how a new form of state capitalism would avoid the tendencies to stagnation exhibited in its first iteration; or how it would sit with a world that contains BitTorrent, a pan-African cellphone banking system and eBay.

This, then, is a book that will confirm your convictions if you believe free-market capitalism is evil; it will provoke physical symptoms of revulsion if you are in any way involved in high finance. It's a plea for a return to industrial policy, bigger government and the welfare state while ducking the question that perplexes all five Labour leadership candidates: how would you make it work?

Paul Mason's Meltdown: The End of the Age of Greed is published by Verso.